For Monday, April 2, 2012, the market forecast is a growth-trend

We recommend any leveraged Exchange Traded Fund (ETF) that grows with the US market.

2-Times Leveraged ETFs

NASDAQ 100

Russell 2000

S&P 500

QLD

UWM

SSO

3-Times Leveraged ETFs

NASDAQ 100

Russell 2000

S&P 500

TQQQ

URTY

UPRO

Technical Comment:

The S&P 500 increased 0.4% on Friday with volume below Thursday and lighter than the 30-day moving average volume.  The S&P 500 would have to decline about 10 points (-0.8%) on Monday for our forecast to return to an uncertain trend.

Subjective Comment:

Friday was the end of the first quarter for 2012, and the S&P 500 is up 12% which is the best first quarter since 1998.  By following our forecast with the SSO leveraged index fund the growth for the first quarter was 20%.  Growth of SSO for the quarter was 26%.  Our forecast did produce a few false signals which accounts for the difference between 20% and 26%.  SSO is a 3x leveraged index fund which means it targets 3-times the daily change of the S&P 500, so over time the frequent rebalancing within the fund results in less than a full 3x leverage.  This is common among all leverage index funds.  To achieve more leverage requires using a margin account, but this exposes an investor to a margin call which can make holding more difficult.

The performance of the S&P 500 during the first quarter is a direct result of the expanding US money supply, as we discussed yesterday.  The key acceleration in the money supply growth occurred in June and July last summer.  There is usually a time lag between the when the money supply accelerates its growth and the markets, economy and price inflation respond.  The strongest money supply growth in the past 2+ years was last summer, and we have just witnessed the strongest S&P 500 quarterly growth in the past 14 years.  Since US M2 (not seasonally adjusted) has remained around 7% annualized straight-line growth since last summer’s 25% growth rate, the S&P 500 should continue to grow from here but it could slow down.  Of course if the M2 growth rate accelerates the S&P 500 could accelerate as well.

The connection between growth in the money supply and its consequences (market growth, economic bubble-boom and price inflation) are not mechanically correlated with a constant predictive relationship.  There are many factors going on that impact the decisions of people, and those decisions turn into the response in the economy.  We are in the early stages of price inflation where the money supply growth is faster than the resulting price inflation.  This is because most people are unaware of the cause of price increases and have not significantly changed their purchasing behavior.  When price inflation continues long enough at ever increasing rates, behaviors change.  Instead of thinking prices will eventually come back down, people begin to think they should buy before prices go up more.  This is what central bankers and mainstream economists refer to as “expectations”.  People’s expectations of price inflation can quickly change, and historically price inflations tend to appear suddenly and surprise a lot of people.  This “sudden” appearance of price inflation is really the sudden awareness as a tipping point of people’s behavior changes into purchasing before prices go up further.

If the US money supply continues to grow at 7% or slows, the bubble-boom we are experiencing will falter and pop.  It is a guess how much longer the stock market bull rally will continue, but our automated forecast continues to show signs of market strength.  No patterns have yet formed to warn of a market decline and there have been few changes in our forecast during the past 3 months.  We think the market will continue to grow from here and we have the tools to identify when the trend will change.  Our investment advice remains the same:

  • Sell all your bonds, including TIPS – they will drop in value as price inflation drives up interest rates
  • Research and invest in hedges against price inflation
  • Invest in leveraged index funds to take advantage of the continuing growth in US markets
  • Keep checking our daily forecast

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